Etihad Airways is a national carrier in the United Arab Emirates and the second-largest fleet in the region. It was established in July 2003 by Sheikh Khalifa bin Zayed Al Nahyan through his Royal (Amiri) decree. However, Etihad Airways commenced operations in November the same year. Since then, the airline has developed to the level of being rank as one of the rapidly growing carriers in commercial aviation.
The company’s vision is to become a global icon in the aviation industry through daring and changing the conventions that have been established by the airline business. The airline’s mission is to represent Arabian hospitality as one that is cultured, warm, generous, and considerate in terms of strengthening Abu Dhabi as a regional hospitality hub. One of the company’s objectives is to provide air transportation services to its loyal customers through bridging the gap in airline hospitality between the West and East.
Also, the airline’s establishment was motivated by the need for a business that would air the United Arab Emirates’ flag in the global space. Furthermore, the company aspires to provide 21st-century services through its state-of-the-art flight experience for its global customers. Besides, the airline also objects to providing cargo services to its international clients alongside passenger flight services.
International Business Model and Company Products
As part of its internationalization model, Etihad Airways has applied the Uppsala model by purposing to acquire much knowledge and experience of its markets of interest before employing significant and risky capital investments. According to Vahlne and Johanson, firms such as Etihad Airways would prefer to initially use cheaper or low-risk models to join new markets where they can invest and commit more capital to better harness the market potential once they are established (195).
The impact of adopting such a sustainable model of growth is that it has allowed the company to increase its investment through buying modern aircraft, providing for additional frequencies, and even introducing additional excellent products to its global clients. Another advantage of adopting the model is that it gives room for the company to acquire pertinent information regarding the new market, thus developing products that address the challenges facing the market. For example, the airline adjusts its charges according to the expected market yield and growth potential.
Based on observations by Sun et al., to succeed in the new markets, the airline has to gain ownership advantages over companies that have already established themselves in the different foreign markets (3). For example, Etihad Airways has exploited its success and experience in product innovation, good employee experience, robust marketing system, and product management to obtain a competitive advantage over its established competitors.
Additionally, the company owns the advantages of the economies of scope, the economies of scale, the availability of aircraft of the parent company, the UAE’s regional support, and marginal cost. Citing product advantage as an ownership advantage of the airline, the high quality of the company’s quality differentiated products and services have made it desirable to potential partners in foreign markets.
The exquisite products and services the airline provides include executive car services, airport lounges, in-flight entertainment, optimum dining, in-flight publications, and free luxury couches. Nonetheless, for its products to gain success in new markets, they will have to undergo the product life cycle. To effectively apply this cycle model, Anselmi and Antti suggest that companies should consider conditional structural changes that their products are likely to undergo in a new market (45). According to Godin, the changes include product innovation, product maturation, and product standardization (98).
In terms of innovation, the airline should consider the demand or gap in the market and invest resources in products that are most likely to succeed in the market. Once it has received sufficient positive feedback from the market, the company can go ahead and develop its products based on feedback. Finally, once the target demand for its products is attained, the company should commit to gain economies of scale such as through the buying of more aircraft and employing more airline crew. Danciu highlights knowledge and cost reduction as the two key advantages offered by an airline company such as Etihad Airways while applying the product cycle model (33).
Culture has been an essential aspect of Etihad Airways’ internationalization agenda. Unintentional and intentional cultural mistakes can lead to reputational damages to a company. To avoid this situation, the company has implemented the Uppsala model of internationalization to learn the cultural heritage of foreign markets before putting up heavy investments in new locations. Additionally, to complement this strategy, the company has undertaken lean product development. Wangwacharakul et al. highlight three key components of lean product development strategy, namely, processes, people, and technology (128).
In terms of processes, the airline has ensured that it designs its products based on the findings concerning customer requirements, which can be influenced by culture. For instance, some cultures such as those in low-income countries do not believe in high spending when it comes to traveling. As a result, the airline has developed affordable and quality flight packages to help in integrating the culture of tourism, an aspect featured in its vision and objectives.
Regarding the aspect of people, the airline considered the social dynamics of its markets. For instance, it has had to employ locals who can relate and communicate effectively with passengers. Finally, as part of its modernization goal, the company has factored in the aspect of technology in facilitating its cultural integration. For example, it has used technology to revamp the designs of its cabin to complement the local flavor. This strategy has improved market responsiveness by attracting local clientele.
The airline has also applied the concept of locational economics regarding the factors of pricing and regulation. About regulation, the company has prioritized investment in liberalized companies such as Europe, the US, India, Qatar, and Kuwait where trade barriers for international airlines have been removed or relaxed. Inflexible airline regulations that limit strategic partnerships and alliances to reduce foreign competition are important factors to consider before investing in any market. In other words, an airline company such as Etihad should invest in geographical locations where the barriers to entry such as limitations in the formation of strategic alliances have been removed. This strategy can make it easier for the firm to enter the new market and/or enjoy fair competition with the local airlines.
Concerning locational economics, different countries experience diverse dynamics concerning air travel demand and consequently pricing. Ideally, air travel companies should apply the Uppsala model by gathering sufficient information regarding the elasticity of the demand for air travel. Having sufficient knowledge of the economic demand for a geographical location will enable an aviation company to tap into the full potential of the foreign market.
For instance, the demand elasticity in developed and emerging countries is low. The implication is that a change in the prices of air tickets will have a little influence on the change in air ticket demand, all other factors held constant, and hence the reason for the high ticket prices in these locations. On the other hand, developing countries in Africa will have a highly elastic demand for air travel. Consequently, a slight increase in the prices of air tickets will result in a drastic drop in demand, assuming that all other factors are kept constant. Thus, the economic demand factors for air travel in different geographical locations have influenced the strategic pricing policy of the UAE-based Etihad Airways in its target markets.
Impact of the Company in its Various International Markets
A report published by Lee indicated that Etihad Airways had announced that it would begin to implement a new fare structure in the UK beginning September 14th, 2015. The move was to provide an assortment of choice for goods that clients could select from. This move meant that travelers could tailor their flight bookings to suit their personal needs. The new flexible fare structures were a strategy by the company to achieve its vision of aligning itself to the changing customer needs in the foreign markets.
A part of the reason for its success in implementing the new fare structure is the relaxation of bilateral restrictions such as fare regulations, most of which favored the local airlines. Oum and Yu highlight that such relaxations have helped to reduce the cost while improving the quality of products and services available to passengers (24). Besides, the relaxations have enhanced cargo carriage fair prices due to the interplays of shifts in demand and supply.
One of the company’s objectives is to link the West and East through making Abu Dhabi the center of airline hospitality in the region. According to Al-Sayeh, internationalization of companies such as Etihad Airways has led to an increase in the demand for more international air travel (2).
This situation has facilitated the liberalization of the markets, especially regarding airline regulations. Al-Sayeh predicts that due to the continued internationalization of airline companies such as Etihad Airways, emerging economies, for instance, Qatar, Kuwait, and China, are set to outgrow developed nations, including the US and the European countries (10).
The entry of low-cost carriers such as Etihad Airways has had a great impact on the profitability of established airlines in the foreign target markets. Malighetti et al. explain that the situation has been witnessed because of the increased competition for customers caused by an increase in the supply of airline services and substitution for a cheaper carrier (192).
Therefore, due to the growing market pressure to reduce the cost of products and services, the existing airways will be left with no choice other than lowering their charges to compete fairly with the new airlines entering the market. Consequently, the entry of Etihad Airways into new markets such as Europe, Asia, and the Middle East effectively reduces the profit margins of the airline industry in a foreign country since the initial profits by the local companies are now shared with the new airline business.
Following the introduction of new exciting products and services to customers in the new markets, the airline has influenced the improvement of products and services standards in the aviation industry. In turn, this move has led to an increase in consumer expectations for quality affordable products and services by the airline hospitality industry. This strategy is motivated by the company’s strategic vision and goals of changing and challenging the airline service industry through the provision of modern state-of-the-art services. It also implies that customers get to be the biggest beneficiaries since they can access airline carriage services in new improved standards and at more pocket-friendly prices.
Problems and Hindrances to the Internationalization Process of Etihad Airways
According to Krenek and Schratzenstaller, government regulations regarding emissions and taxation are one of the major issues that have negatively affected the ability of airlines to penetrate new markets and maximize market potential (2). For instance, the EU Emissions Trading Schemes requires airlines such as Etihad that fly into the European aerospace to pay for carbon emissions. Moreover, in a bid to protect their national airlines, various countries increase operational taxes for international airlines. These regulations have caused the airline to incur higher costs of operation while maintaining its reasonable prices and quality products. The effect of this situation has been a reduction in the profit margins for the company.
Customers’ loyalty to local airlines is a considerable problem and barrier to the penetration of Etihad Airways into new markets because of the long built trust between the locals and the existing neighborhood airlines. To win over customers and/or create brand loyalty, Muriithi asserts that international companies such as Etihad need to continuously innovate and improve the quality of products and services (12).
Furthermore, Chen and Hsin-Hui believe that product and service quality has a positive and direct impact on influencing customer loyalty (1084). However, this effect is not enough since the airline will still need to communicate its brand message to its potential customers to lure them away from their loyal brands. This claim reveals the reason why the airline has invested heavily in a marketing strategy through using models such as the mainstream media, digital media, social media, and even the sponsorship of football clubs.
Ryerson and Hansen explain the effect of the reported tenfold global increase in jet fuel prices in 2008 on airlines since 2004 in a response to control costs (282). According to reports, the increase in fuel prices caused a reduction in the number of flights taken by airlines to the extent of some airlines ceasing operations (Ryerson and Hansen 283).
The reports indicate that fuel cost can greatly influence an airline’s cost of operation, forcing it to make the necessary adjustments to remain profitable, both in the short and long run. For example, the increased costs in fuel prices would reduce the profit margins for Etihad Airways, thus limiting the company’s resources necessary for expansion into new markets.
According to Belobaba et al.’s observations, economic downturns by events such as the 9/11 and 2008 economic crises negatively affected the volume of travel and fare prices (6). At the same time, high inflation experienced also affected the airlines’ costs of labor and fuel prices. Such economic factors can be a threat to the airline due to its effect on revenue reduction. For instance, high operating costs can cause the airline to take drastic measures such as the reduction of the number of staff, increase in fare prices against its pricing policy, and the decrease in the frequency of flights. These measures may potentially risk the company’s ability to gain and maintain the loyalty of its customers in the new markets due to the perceptions of deterioration in the products and services standards.
Etihad Airways is a national airline in the United Arab Emirates and the second largest in the Middle East region. Sheikh Khalifa bin Zayed Al Nahyan started the airline through his Royal (Amiri) pronouncement in July 2003. The company commenced its operations in November the same year. It has immensely grown to become one of the most rapidly growing international airlines in the world. The company’s vision is to become a global aviation icon through challenging and daring the established conventions in the industry through its high-quality products and services. The company also objects to bridge the gap in airline hospitality in the West and East of the region through making Abu Dhabi a central hospitality zone.
In its internationalization strategy, the company has used various models to aid in this process. The frameworks include the Uppsala model, ownership advantage strategy, cultural theory approach, and the locational model. The internationalization of the company has influenced its new markets through the reasonable pricing of tickets, the standards of products in the aviation industry, and the general profitability of the industry. The airline has faced several barriers during the implementation of its internationalization strategy, including high fuel prices, economic challenges, regulatory issues, and customer loyalty.
Throughout the paper, our group has learned that the internationalization of business calls for the watchful selection of various models that are most applicable to the industry. Moreover, a company should have a comprehensive understanding of the challenges or problems it might face during its internationalization process. Particularly, it should understand well the regulatory and economic challenges that may limit its expansion directly or indirectly.
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